Development expenditures and the local financing constraint

Focusing on the local financing constraint sheds new light on issues of aid, fiscal reform, and the management of public spending. The fungibility of aid need not translate into resource flows to fill the local financing gap. Indeed, project aid can widen the local financing gap. To augment direct local financing of development, aid must be nonproject aid that can generate local currency. In the longer term, project aid's effect on local financing lies in its impact on growth and on expanding the base for tax revenues, seigniorage, and borrowing. When inadequate local financing limits project implementation and effective use of aid, local currency funds are more valuable than project aid, at the margin--and it becomes important to reallocate local funds, to leverage project aid, and to raise the quality of investment projects. A persistent gap in local financing complicates programs of fiscal reform. For such programs to be effective, the local financing gap has to be confronted directly by matching planned local fund expenditures against expected local fund receipts. This requires a transparent database to develop indicators and to monitor the allocation and use of local resources.Development Economics&Aid Effectiveness,Economic Theory&Research,Environmental Economics&Policies,Payment Systems&Infrastructure,Fiscal&Monetary Policy,Environmental Economics&Policies,Development Economics&Aid Effectiveness,National Governance,Fiscal&Monetary Policy,Economic Theory&Research

Dispute Resolution in International Project Finance Transactions

This essay discusses how the legal practice in international financial problems has slowly evolved towards a better recognition of international arbitration in the field of project financing. While it is useful to compare the different types of dispute resolution mechanisms that are to be considered by participants for the implementation of their contracts, it is this author\u27s view that international arbitration is the most effective means of resolving international project finance transactions. Indeed, the assessment of the most effective forum cannot dismiss what this author considers as an essential feature of international project financing, i.e., its transactional unity. As a result, international arbitration is the most appropriate mechanism to deal with corollary specificities of international project financing, such as multi-party disputes. The business, and possibly, legal unity of international project finance transactions therefore determines the resolution of the disputes arising with respect to those transactions

Project Financing when the Principal Cannot Commit

Suppose an entrepreneur needs funds from a financier to invest in a risky project whose cost is fixed, and whose return may be high or low. Suppose also that the project's realized return is an information that is private to the entrepreneur. If the amount the entrepreneur pays back to the financier depends on the risky project's outcome, if it is costly for the financier to verify the project's true realized return, and if the financier cannot commit to an auditing strategy, then it is optimal for the entrepreneur to misreport the true state of the world with some probability. In other words, it is in the entrepreneur's interest to lie with a degree of probability. We find that the entrepreneur over-finances his project when the financier cannot commit, and that he has greater wealth ex post if the project is not successful. Over-borrowing and greater wealth in the low-return state result in reducing the number of false reports in the economy. Prenons une économie où un entrepreneur a besoin de financement afin d'entreprendre un projet risqué dont le coût est fixe et dont le rendement peut être faible ou élevé. Supposons alors que ce rendement est une information privée de l'entrepreneur. Si le montant que l'entrepreneur doit rembourser au financier dépend du rendement sur le projet risqué, s'il est coûteux pour le financier de vérifier le rendement réel du projet, et si le financier ne peut se commettre en une stratégie de vérification, alors il devient optimal pour l'entrepreneur de ne pas dire la vérité tout le temps. Nous trouvons premièrement que l'entrepreneur sur-finance son projet d'investissement si le financier ne peut se commettre, et deuxièmement que l'entrepreneur a une plus grande richesse ex post si le projet ne porte pas fruit. Ce sur-financement et cette plus grande richesse dans le mauvais état de la nature sont le produit de l'absence d'engagement de la part du principal qui doit utiliser ces signaux coûteux afin de réduire le nombre de faux messages dans l'économie.Commitment, financing, asymmetric information, ex post moral hazard, Engagement, financement, information asymétrique, aléa moral ex post

Constitutional Design: Separation of Financing and Project Decision

We examine the provision of public projects under separate tax and subsidy rules. We find that tax rules separated from project cum subsidy decisions exhibit several advantages when incentive problems of the agenda-setter are taken into account. In particular, tax rules may prevent the proposal of inefficient projects which benefit only a small lobby group. We propose “redistribution efficiency” as a socially desirable property of proposals and find that tax rules always guarantee redistribution efficiency. We show that rules on subsidies combined with discretion regarding taxes always yield socially inferior proposals. Finally, tax rules induce the agenda-setter to look for potential improvements of public projects.constitutional design, provision of public projects, voting, taxes and subsidies

The Determinants of Debt and (Private-) Equity Financing in Young Innovative SMEs: Evidence from Germany

Financial theory creates a puzzle. Some authors argue that high-risk entrepreneurs choose debt contracts instead of equity contracts since risky but high returns are of relatively more value for a loan-financed firm. On the contrary, authors who focus explicitly on start-up finance predict that entrepreneurs are the more likely to seek equity-like venture capital contracts, the more risky their projects are. Our paper makes a first step to resolve this puzzle empirically. We present microeconometric evidence on the determinants of debt and equity financing in young and innovative SMEs. We pay special attention to the role of risk for the choice of the financing method. Since risk is not directly observable we use different indicators for financial and project risk. It turns out that our data generally confirms the hypothesis that the probability that a young high-tech firm receives equity financing is an increasing function of the financial risk. With regard to the intrinsic project risk, our results are less conclusive, as some of our indicators of a risky project are found to have a negative effect on the likelihood to be financed by private equity.monetary policy rules, zero interest rate bound, liquidity trap, rational expectations, nominal rigidities, exchange rates, monetary transmission.Debt and equity financing, financial risk and project risk, venture capital and bank financing

FINANCING OF RAILWAY INFRASTRUCTURE IN SLOVENIA

In the paper we present a BOT (Build, Operate, Transfer) model of financing railway infrastructure development in the Republic of Slovenia. It is characteristic of this form of project financing that the host country or a local community grants a private project company or consortium a concession to build and manage the public infrastructure. By signing the concession contract, the concessionaire binds himself/herself to transfer all the property rights from the project back to the grantor at the end of the concession period without additional transaction costs at the end of the concession period.public-private partnerships, project finance, infrastructure, railway, Slovenia.

The Financing of Innovation: Learning and Stopping

This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success.The uncertainty about future success gradually diminishes with the arrival of additional funding.The entrepreneur controls the funds and can divert them.We distinguish between relationship financing, meaning that the entrepreneur's allocation of the funds is observable, and arm's length financing, where it is unobservable.We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes.We characterize the optimal contracts and equilibrium funding decisions.The financial constraints will typically become tighter over time under relationship finance, and looser under arm's length financing.The trade-off is that while relationship financing may require smaller information rents, arm's length financing amounts to an implicit commitment to a finite funding horizon.The lack of such a commitment under relationship financing implies that the sustainable release of funds eventually slows down.We obtain the surprising result that arm's length contracts are preferable in a Pareto sense.innovation;finance;venture capital;learning

How to Finance the Security of the International Trade ? A Global Public Good Approach

The aim of this article is to identify the modalities of financing international trade security. Our analysis is more specifically oriented by the issue of financing the developing countries which must make a considerable effort to attain the required level, whereas the developed countries have already largely invested in trade security since the events of 11th September 2001. We first characterise security in the context of a global public good, before studying the financing conditions and the discriminating criteria of the supply of the global public good security. We then presents a critical analysis of the various possible sources and instruments for financing the global public good security and propose different financing scenarios, each one based on a specific allocation of responsibilities among the players in security. We conclude by considering the role of the international institutions as project managers of the financing and implementation of the security of international trade.international, financing, global public goods, international trade, security

Assessing the Constraints and Opportunities for Private Sector Participation in Activities Implemented Jointly: Two Case Studies From the U.S. Initiative for Joint Implementation

This paper assesses the constraints and opportunities for private-sector participation in Activities Implemented Jointly under the United Nations Framework Convention on Climate Change. After some initial background, the discussion turns to the United States Initiative on Joint Implementation (USIJI)—its objectives, proposal review and evaluation criteria, and a classification of project proposals by project type and stage of development. Two USIJI projects are developed as case studies. One case is an energy end use project that has gained formal acceptance and financing. The other case is an energy production project proposal that has not secured acceptance or financing. In both cases, transaction costs were substantial, and project proponents regarded gaining formal host country acceptance as the principal impediment to project development. The cases illustrate how the host country JI project approval process can become entangled in broader struggles over economic reforms. The cases also suggest that JI project proponents may have divergent perspectives on the speculative value of greenhouse gas (GHG) credits. An enforceable cap on GHG emissions in the project funders’ countries, which is a prerequisite to establishing any market for the credits, is contrary to the position of energy and power suppliers who promote voluntary emissions reductions. For emissions reduction technology firms, however, establishing a value for GHG credits would help generate demand for the firms’ stock in trade. Finally, the study underscores that notwithstanding transaction costs associated with JI proposal development and acceptance, financing remains the ultimate hurdle to project implementation.